Beyond Regulation

The ‘standard model’ of electricity reform has been refined in many countries but not extended to others. Government is supplanting the role of regulation. Revised calculations suggest that the benefits of UK electricity privatisation were higher than previously estimated and more widely shared with consumers. Other calculations suggest that generation market power in the US is less than previously estimated by Lerner index calculations. Unduly tight price controls explain why there has been less customer switching in some residential electricity markets. There has been significant development of fixed price contracts in Nordic markets, posing questions for regulation in the absence of retail competition. There are alternatives to regulation of network monopolies. In Australia regulated interconnectors have been less economic than merchant interconnectors. In Argentina arrangements for users to determine transmission expansions have worked well. In Florida negotiated settlements have secured a better deal for customers than regulation

UK domestic energy contracts, the 28 day rule, and experience in Sweden

In the UK, domestic customers must be able to terminate energy contracts at 28 days� notice. This has been seen as a transitional protection for customers and for competition. This paper reviews the arguments for and against the 28 day rule, and examines the extent to which UK suppliers have offered fixed-price fixed-term contracts. It also looks at experience in Sweden, where there is no such restriction and where there is greater use of fixed-price fixed-term contracts. The paper concludes that there is no longer a need for the 28 day rule to protect customers, and that it is more likely to restrict than to protect competition

Municipal Aggregation and Retail Competition in the Ohio Energy Sector

We study incumbency advantage in a dynamic game with incomplete information between an incumbent and a voter. The incumbent knows the true state of the world, e.g., the severity of an economic recession or the level of criminal activities, and can choose the quality of his policy. This quality and the state of the world determine the policy outcome, i.e., the economic growth rate or the number of crimes committed. The voter only observes the policy outcome and then decides whether to reelect the incumbent or not. Her preferences are such that she would reelect the incumbent under full information if and only if the state of the world is above a given threshold level. In equilibrium, the incumbent is reelected in more states of the world than he would be under full information. In particular, he chooses inefficient policies and generates mediocre policy outcomes whenever the voter's induced belief distribution will be such that her expected utility of reelecting the incumbent exceeds her expected utility of electing the opposition candidate. Hence, there is an incumbency advantage through inefficient policies. We provide empirical evidence consistent with the prediction that reelection concerns may induce incumbents to generate mediocre outcomes

Competition in Retail Electricity Supply

This paper presents an analysis and defence of competition in retail electricity supply. It includes some account of its development in the UK over the last dozen years, to the point where all retail price controls have now been removed. The development of this competition illustrates a number of the themes in Israel Kirzner’s writing - for example, the nature of competition as a process over time, the entrepreneurial and learning nature of this process, the role of marketing in alerting customers, the role of competition in establishing price and in discovering the services and suppliers that customers prefer, and the advantages of competition over regulation.competition, electricity, regulation, Austrian economics

Reform and Regulation of the Electricity Sectors in Developing Countries

Reform and Regulation of the Electricity Sectors in Developing Countrie

Transmission Expansion in Argentina 5: The Regional Electricity Forum of Buenos Aires Province

This paper supplements analyses of Argentine transmission expansions at the federal level by looking at experience in Buenos Aires province. A Regional Electricity Forum of distribution companies has drawn up and begun to implement a ten-year transmission expansion plan. Contrary to previous fears, getting agreement between the members on investment and cost sharing has not been unduly problematic. More challenging was getting approval of the provincial government on funding. Deferring tariff reductions and using the revenues for investment facilitated the process, and now some innovative financing arrangements are underway. Again contrary to some previous suggestions, the controversial Area of Influence method was extended rather than replaced. This overcame concerns about free-riding. Progress and investment have been severely curtailed by the economic crisis in 2001 and subsequent federal government policy. The arrangements nonetheless appear to be working well, and to be conducive to more efficient transmission expansion. This confirms that it is practicable and advantageous to allow users rather than the transmission company or the regulator to propose and determine transmission investment, even in a meshed rather than radial system. An appropriate regulatory framework is needed to approve that part of the total budget to paid by distribution business consumers, but this does not require the regulator to lead or monitor the detail of the process

Competition and contracts in the Nordic Residential Electricity Markets

The main Nordic residential electricity markets (Norway, Sweden and Finland) effectively opened to retail competition around 1998. They have not been subject to regulatory controls on prices or other contract terms. Between 11 and 29 per cent of residential customers have switched suppliers and between a fifth and a half of all residential customers have chosen alternative contractual terms of supply. These alternatives include fixed price contracts ranging from 3 months to five years duration, as well as spot-price related terms, instead of the standard variable tariffs. The use of these alternatives is increasing over time, and there is considerable product innovation. This paper surveys these developments and illustrates with case studies of significant suppliers in each Nordic market. The market is thus ascertaining and bringing about the outcomes that customers prefer. Without retail competition, it is not clear how regulation will replicate this aspect of the market process

Regulated and merchant interconnectors in Australia: SNI and Murraylink revisited

This paper examines the history of the various actual and proposed interconnectors between New South Wales and Victoria into South Australia. It covers the period from the earliest proposal for a regulated interconnector to the recent Victoria Supreme Court review and the latest ministerial proposals. It finds, inter alia, that the Supreme Court decision is likely to have strengthened, in a beneficial way, the regulatory regime for dealing with merchant interconnectors and the obligations on incumbent transmission companies. It finds that none of the proposals for regulated interconnectors did or would have passed the regulatory tests as formulated in terms of aggregate benefits to all market participants. It finds that neither of the merchant interconnectors (into South Australia and Queensland) are likely to have been profitable. It sees a possible explanation for the construction of regulated interconnectors in terms of the benefits to customers, or in terms of bringing about a single competitive market. Above all, it illustrates the political context in which decisions on interconnectors have been made, and the need to take account of such motivations when comparing the likely effects of regulated interconnectors versus merchant interconnector

Competitive Bidding for a Long-term Electricity Distribution Contract

Demsetz (1968) advocated competitive bidding as a replacement for natural monopoly regulation. Williamson (1976) and Goldberg (1976) argued that these problems of natural monopoly regulation are inherent in long-term investment under uncertainty, and that both long- and short-term franchising contracts may be more problematic than regulation. Williams illustrated this argument with the problems experienced in bidding to provide cable TV in Oakland. London Underground recently put out top tender to provide cable (thirty-year) contract for operation, maintenance, repair and renewal of its electricity distribution network. The evidence of this contract suggests that competitive bidding to provide a natural monopoly service is feasible and advantageous. The problems in Oakland CATV case were not encountered. However, the contract involves considerable resources to formulate and monitor, and envisages repeated modification and additional works. The possibility of competitive contracting to replace or supplement utility network regulation deserves further consideration

The Bird in the Hand: Stipulated Settlements and Electricity Regulation in Florida

In the last two decades many major regulatory issues in Florida have been resolved by means of stipulated settlements between the utilities and interested parties, notably the Office of Public Counsel, instead of by the traditional method of hearings and litigation before the Public Services Commission. This paper investigates the extent, nature and effects of these stipulations in the electricity sector there. They have now largely superceded the litigated process. Their purpose is not to save costs, which are orders of magnitude less than the revenues at stake. Stipulations have brought reductions in electricity revenues worth over £3 billion, mainly during the last decade. These reductions are greater than would have overwise occurred: about three quarters might never have occurred at all. In some cases a change in the method of rate reduction favoured industrial consumers but other customers are nonetheless likely to have benefited despite this. Some benefits were outside the scope of the commission to confer. Other benefits reflected a more flexible accounting policy. Most importantly, there has been a shift from conventional rate of return regulation, and from earnings sharing schemes with profits caps, to prices fixed for specified periods of time with revenue-sharing incentive arrangements. Stipulations have transformed the regulatory landscape in the Florida electricity sector, and their use seems worth considering elsewhere